Crypto newsletter: Bitcoin surges towards record high as ETF debut looms

Cryptocurrency market is again attracting investors' attention after the sharp sell-off which occured in May, following China regulatory crackdown. After the initial shock, prices started to move north and the latest news from the US added fuel for the rally. Recently Bitcoin crossed the $60,000 mark for the for the first time since April. The bullish move came on excitement surrounding progress on bitcoin ETFs.  In this report, we will discuss the factors behind the recent strong gains and how the SEC decision could affect the entire cryptocurrency market in the future.

Bitcoin ETF overshadows China ban

The cryptocurrency market took a severe hit in May when China stepped up its crackdown on bitcoin trading and mining. However, Beijing's actions again did not have a long-term impact on the markets, as most of the miners moved to other countries, mainly the USA and Kazakhstan. As a result less than five months after China initiated a regulatory crackdown, Bitcoin's hash rate has managed to recover most of the losses which coupled with several other factors lead to price recovery. However the main reason behind the recent bullish move was the expected debut of the first US Bitcoin futures exchange traded fund (ETF).

ETFs are passive investment vehicles that have won investors' appeal, thanks to ease of investing as well as long-term outperformance over active funds.  Launching Bitcoin ETFs therefore opens the way to the cryptocurrency world for many investors that were earlier unconvinced by risks associated with investing in cryptocurrencies (lack of regulation, risk of wallet hack etc.).

Since 2013, the US Securities and Exchange Commission (SEC) has rejected attempts to create a Bitcoin ETF. However, last week, the SEC fueled speculation of the approval after it shared the following advice on Twitter, "Before investing in a fund that holds Bitcoin futures contracts, make sure you carefully weigh the potential risks and benefits."

Now ProShares ETF, which is based on futures contracts, is expected to start trading Tuesday after it completed a 75-day period since the fund manager submitting the application for the creation of the fund. ​It's not quite the pure bitcoin ETF that many crypto investors were hoping for, but it may drive institutions towards the digital-asset market like never before. SEC chief Gary Gensler has been reluctant to approve a pure bitcoin ETF.

But the SEC reckons a futures ETF is safer. Bitcoin futures are offered by the Chicago Mercantile Exchange, a huge financial institution. Investors also have to put down collateral to trade futures. Another ETF firm, Valkyrie, has also filed for a bitcoin ETF. Last week, the Nasdaq disclosed in a SEC filing that the Valkyrie fund was ready for listing on the exchange — pending a final approval from the SEC.

Crypto ETFs have launched this year in Canada and Europe, growing in popularity amid surging interest in digital assets and this trend is expected to continue in the future. Already several fund managers, including the VanEck Bitcoin Trust, Invesco and Galaxy Digital Funds, have applied to launch bitcoin ETFs in the US. Institutional investment giant Grayscale is reportedly considering converting its Bitcoin Trust into a physically settled exchange-traded fund (ETF). This is set to make cryptocurrency available to a large number of traders.

Other factors affecting cryptocurrency prices

Many investors believe Bitcoin to be the most dependable investment for 2021. Besides launch of the new ETF in the US, there are other  important reasons why there is so much excitement around Bitcoin. Below we present some major trends to keep an eye out for in the Bitcoin ecosystem.

Firstly, there is a growing interest from institutional investors who have a large amount of money to invest. Most importantly, in the future, they intend to invest more funds in Bitcoin and its derivatives, which may lead to even stronger price increases.

Last week, digital asset investment products saw inflows totalling US$226m, bringing the 8 week run of inflows to US$638m. Total assets under management (AuM) are now only 5% short of the all-time high at US$67bn due to recent positive price action. Source: CoinShares

An equally major factor is the adoption of cryptocurrencies in everyday life.  PayPal recently announced that it would include cryptocurrencies into its payment network for the benefit of its customers. Using the PayPal network, users may now make payments in cryptocurrencies and buy goods and services in exchange for digital currency. According to the company, Bitcoin Cash, Ethereum, Litecoin, and XRP will be integrated into PayPal's platform. Even rumors regarding the implementation of cryptocurrencies by large companies can significantly affect the prices, as was the case with Litecoin, whose price jumped 36% in 20 minutes only to fell sharpy after news regarding cooperation with Walmart turned out to be false.

Last but not least, development of decentralized financial services may emerge as one of the most significant developments in the cryptocurrency industry in the future. These initiatives have successfully demonstrated the use cases for cryptocurrencies in the financial sector in a brief period. Further development of this segment should act as major driver in the adoption of digital asset storage and tokenization in the future. Smart contracts have shown to be effective in various applications, beyond only financial services, as demonstrated by the DeFi initiatives. They are expected to be the next major trend in the whole financial industry. DeFi started the year 2020 with a total value of locked assets of $683.35 million, and by the end of the year, the number had risen to well over $14 billion, representing a more than 2,000% increase in value.

Can BITCOIN rise above $100000?

Cryptocurrencies are the best performing assets of the last decade and this is the main weapon for the bulls going forward. There were ups and downs but each drawdown was followed by even more impressive rally. Yes, the present rally without a landslide bear market lasts already nearly 3 years but each previous one ended with mind-boggling buying frenzy, something that is missing right now. There was never a massive, 80%+ bear market following a double top - something we are looking at right now. The bullish argument is that such final stretch similar to previous rallies could easily top $100000. 

Time could be up for another huge bear market. However, each of those was preceded by very steep price gains - something we are missing right now. Source: xStation5

Crypto bears meanwhile point at the hype. Their argument is that every now and then there is a brutal,  80%+ bear market that undermines faith in cryptos. They can rightly point out that introduction of CME Bitcoin futures in December 2017 actually started one such bear market (even though it was seen as a sign of acceptance, the way the ETF is today). However, one should not blindly assume that this situation just repeats itself.

Introduction of the CME Bitcoin futures at the of 2017 did not prevent a deep, one-year long bear market. Source: Macrobond, XTB Research

US regulations could be crucial here. Markets see a green light for the ETF from the SEC as a proof of acceptance. We also know that more regulations are coming. Now the question is - will these regulations allow cryptos to flourish or will they be too tough and contain market growth? One concern is that DeFi platforms offer bank-like services but without the same levels of consumer protection as traditional banks.Investors will look for 2 things:

1. Will the SEC allow a physical bitcoin ETF? 

2. More importantly - will crypto regulations limit their use in payments and money transfers?

These two issues can be decisive for the extent of the present rally on Bitcoin and other cryptocurrencies. 

Is alts rally around the corner?

Anticipation of the ETF's listing appeared to boost the price of bitcoin this month. The cryptocurrency has jumped more than 40% in October and is approaching its all-time high. Currently, the situation resembles a period of 2018, when the price of Bitcoin was rising sharply, while altcoins were lagging behind. However, later on, smaller projects managed to return to the upward trend and often managed to outperform Bitcoin. In the example below, one can see that the price of Binance Coin was rising significantly, while the bears began to take control of the Bitcoin market.

Source: xStation5

Hot coins to watch

Cardano network has over 2.8 million active users, up 7.3 times since the beginning of 2021 according to the latest report from Grayscale. The asset management firm valued the altcoin in terms of active users per month and revealed that Cardano is currently nearly 45% cheaper than Ethereum. The important thing is that since the beginning of this year, the number of transactions in ADA increased 13 times and now amounts to 113,000 transactions per day.

Cardano’s monthly active wallet address count exceeds Ethereum, fueling the narrative that ADA is ready to take over the largest altcoin by market capitalization. Source: FxStreet  

Meanwhile Ethereum is still waiting for the transition to Ethereum 2.0 (postponed until Q4 2021 or Q1 2022, it has already been postponed many times). In their latest development update on October 16th, the developers team revealed that the transition to proof-of-stake will be complete by February 2022.